Duties of Shareholders
In addition to the responsibilities described above, directors and officers of Washington State companies have a duty to provide their shareholders with open, honest, and timely disclosures of the company’s financial condition and well-being. The federal securities laws are intended to ensure open and honest communications between publicly held companies and its shareholders and to offer remedies to the shareholders for any misrepresentations. These remedies are codified in several U.S. statutes. They include the Securities Act of 1933 (also referred to herein as the 1933 Act), the Securities and Exchange Act of 1934 (also referred to herein as the 1934 Act), and the Public Company Accounting and Investor Protection Act of 2002 (also referred to herein as the Sarbanes-Oxley, or SOX).
Under Section 11 of the 1933 Act, a shareholder may sue the corporate directors and any other party that signs a registration statement filed with the U.S. government that contains material misrepresentations. Section 12(2) of the 1933 Act creates liability of directors and officers for misrepresentations in a prospectus or public offering. It is similar to Section 11, but applies to the actual selling of a public offering through oral communications, or prospectuses, which can be sales brochures. The 1934 Act established the SEC and gave it the power to establish an anti-fraud rule, governing the daily trading of stock, which eventually led to the creation of a platform for filing securities class action lawsuits.[1] Section 10(b) of the 1934 Act is the enabling legislation that authorized the U.S. Securities and Exchange Commission (SEC) to create Rule 10b-5, which prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of stock. Among other remedies, it provides a private cause of action for misrepresentations in the sale and purchase of stock. Section 14(d)(7) and Rule 14d-10 of the 1934 Act provide a cause of action for unequal treatment in proxy statements or tender offers, which have also been a source of alleged violations in securities class actions. Finally, Section 20A establishes liability for insider trading, which is an active and significant basis for liability in securities claims.
SOX is intended to increase corporate shareholder disclosures and audit committees’ responsibilities, as well as to create a host of regulatory reporting requirements and oversight obligations It was enacted in the aftermath of the Enron, Worldcom, and HealthSouth bankruptcies. Under SOX, directors are required to disclose in quarterly and year-end reports that:
• The CEO and CFO have reviewed the financials;
• To their knowledge, the financials do not contain material misrepresentations or omissions;
• Internal controls have been evaluated;
• The auditors along with the board have been notified of any weaknesses; and
• Certain frauds have been reported to the board.[2]
The disclosure requirements under SOX place corporate directors and officers under increased scrutiny. To the extent that any one of the disclosures is false, senior management will face an increased probability of regulatory actions or securities class actions being filed, and liability being established against corporate directors and officers due to the false disclosures. In addition to its disclosure requirements, SOX provides other restrictions and obligations to the audit committee, of the board of directors, as well as a corporation’s outside attorneys and external auditors.
The Securities Act of Washington (“SAW”) serves a distinctly different function than the U.S. securities laws. Where the federal laws seek to insure open and honest disclosures of publically held corporations, the SAW is intended to protect investors from improper commercial practices. The SAW is codified in chapter 21.20 of the RCW. RCW 21.20.010 parallels Rule 10b-5, the anti-fraud provision of the 1934 Act. In addition, RCW 21.20.140 through 21.20.230 governs the registration of securities, and 21.20.430, which is modeled after 12(2) establishes civil liabilities to any person who violates the provisions of the anti-fraud statue or any provision of the registration of securities, in connection with its offering or sale. The case of Haberman v. WPPSS, 744 P2d 1032 (1987), addresses, among other issues, the remedies available under RCW 21.20.430 due to purported misrepresentations and omissions in connection with the sale of revenue bonds and the resulting default of $2.25bil all to finance construction of two nuclear power plants by Washington Public Power Supply System (“WPPSS”). In Haberman, the Supreme Court of Washington held that: “…a defendant is liable as a seller under RCW 21.20.430(1) if his acts were a substantial contributive factor in the sales transaction (emphasis added).[3] The substantial contributive factor test extends to directors and officers of Washington State Corporations.
[1] Class action proceedings are available under both the 1933 and the 1934 Acts. This paper will address the elements of class certification below.
[2] Sarbanes-Oxley Act of 2002, PL 107- 204, § 302, Corporate Responsibility for Financial Reports.
[3] Haberman v. WPPSS, 744 P.2d 1032, 1041 (1987)
Under Section 11 of the 1933 Act, a shareholder may sue the corporate directors and any other party that signs a registration statement filed with the U.S. government that contains material misrepresentations. Section 12(2) of the 1933 Act creates liability of directors and officers for misrepresentations in a prospectus or public offering. It is similar to Section 11, but applies to the actual selling of a public offering through oral communications, or prospectuses, which can be sales brochures. The 1934 Act established the SEC and gave it the power to establish an anti-fraud rule, governing the daily trading of stock, which eventually led to the creation of a platform for filing securities class action lawsuits.[1] Section 10(b) of the 1934 Act is the enabling legislation that authorized the U.S. Securities and Exchange Commission (SEC) to create Rule 10b-5, which prohibits any act or omission resulting in fraud or deceit in connection with the purchase or sale of stock. Among other remedies, it provides a private cause of action for misrepresentations in the sale and purchase of stock. Section 14(d)(7) and Rule 14d-10 of the 1934 Act provide a cause of action for unequal treatment in proxy statements or tender offers, which have also been a source of alleged violations in securities class actions. Finally, Section 20A establishes liability for insider trading, which is an active and significant basis for liability in securities claims.
SOX is intended to increase corporate shareholder disclosures and audit committees’ responsibilities, as well as to create a host of regulatory reporting requirements and oversight obligations It was enacted in the aftermath of the Enron, Worldcom, and HealthSouth bankruptcies. Under SOX, directors are required to disclose in quarterly and year-end reports that:
• The CEO and CFO have reviewed the financials;
• To their knowledge, the financials do not contain material misrepresentations or omissions;
• Internal controls have been evaluated;
• The auditors along with the board have been notified of any weaknesses; and
• Certain frauds have been reported to the board.[2]
The disclosure requirements under SOX place corporate directors and officers under increased scrutiny. To the extent that any one of the disclosures is false, senior management will face an increased probability of regulatory actions or securities class actions being filed, and liability being established against corporate directors and officers due to the false disclosures. In addition to its disclosure requirements, SOX provides other restrictions and obligations to the audit committee, of the board of directors, as well as a corporation’s outside attorneys and external auditors.
The Securities Act of Washington (“SAW”) serves a distinctly different function than the U.S. securities laws. Where the federal laws seek to insure open and honest disclosures of publically held corporations, the SAW is intended to protect investors from improper commercial practices. The SAW is codified in chapter 21.20 of the RCW. RCW 21.20.010 parallels Rule 10b-5, the anti-fraud provision of the 1934 Act. In addition, RCW 21.20.140 through 21.20.230 governs the registration of securities, and 21.20.430, which is modeled after 12(2) establishes civil liabilities to any person who violates the provisions of the anti-fraud statue or any provision of the registration of securities, in connection with its offering or sale. The case of Haberman v. WPPSS, 744 P2d 1032 (1987), addresses, among other issues, the remedies available under RCW 21.20.430 due to purported misrepresentations and omissions in connection with the sale of revenue bonds and the resulting default of $2.25bil all to finance construction of two nuclear power plants by Washington Public Power Supply System (“WPPSS”). In Haberman, the Supreme Court of Washington held that: “…a defendant is liable as a seller under RCW 21.20.430(1) if his acts were a substantial contributive factor in the sales transaction (emphasis added).[3] The substantial contributive factor test extends to directors and officers of Washington State Corporations.
[1] Class action proceedings are available under both the 1933 and the 1934 Acts. This paper will address the elements of class certification below.
[2] Sarbanes-Oxley Act of 2002, PL 107- 204, § 302, Corporate Responsibility for Financial Reports.
[3] Haberman v. WPPSS, 744 P.2d 1032, 1041 (1987)